So, who moved my money?
4 Dec 2013 12:30 AM GMT
Did you ever worry about banks not getting back their money given out in loans? Not possibly. But the Reserve Bank of India is. In its latest report on trends in Indian banking, RBI has noted how fast the loan losses of Indian public sector banks are rising. There are two aspects: one is the amount of bad loans (that is, loans against which banks are not getting interest or repayment of dues for three quarters). The second aspect is the trends, that is, whether bad loans are rising or falling.
First, bad loans (euphemistically called non-performing assets) stood at a humongous Rs 1,42,900 crore at the end of 2011-2012. This has now risen to Rs 1,94,000 crore in 2012-2013. So we see that while the absolute amount of loans which look like doubtful about recovery is huge, the increase in such loans is sharp.
Further, the RBI report indicates that the public sector banks, which we look as invincible being backed by the government of India, are faring far worse in this aspect than private banks and the foreign banks operating in India are in the best situation in this respect. Of the public sector banks, State Bank of India, which is seen as standing at the apex of Indian banking structure, has the worst record. It has a far higher bad loans portfolio than others.
Much of this is due to political interference and the general policies the country has been following. Of course, there might instances when bank officials might have erred in judgment.
This should be a matter of concern for the average bank depositor as well, because it is their money that the banks lend to borrowers. If these loans are not returned in time, and the amounts go up disproportionately, it is the depositors who might have to bear the cross. In the worst case, if a bank fails under the weight of bad loan losses, the depositor might lose most of his money. The only consolation left will be some token amounts from the Deposit Insurance Corporation of India.
That is possibly an alarmist view and not likely in the immediate horizon, but if things should not go worse it should be now to check the loan losses of banks. Those who are borrowing from banks must know that their first charge was to repay those loans. No escape. The rules and procedures for recovery of bank loans should also be such that the banks should be able to reclaim their funds sequestrating all property, including personal properties, of bank borrowers expeditiously.
Currently, there is an environment in which bank loan defaulters do not face any harassment or social stigma. Maybe, they are secretly envied or admired on having escaped without repaying their loans. This happens mostly to big borrowers. Small borrowers of course repay their dues for fear of losing all their mortgages, unless government itself ask them not to pay back.
And why not? It is the government which is responsible for such a culture of not returning bank loans. Consider for example what the government proposes to do to UP and Maharashtra sugar mills. The state government have raised the minimum price for sugar cane to Rs 280 per quintal. The mills say at current sugar price, they can’t produce paying this much for sugar cane.
The government is promising them sops – including interest free bank loans – and in fact working detailed packages for these mills to start buying sugar cane at the stipulated minimum support price and begin their sugar crushing operations. When state elections are on and the next national parliamentary elections are round the corner, government is keen to see sugar canes are lifted from farmers. Such is the importance of the sugar farming community in several states that a special task force has been constituted at the centre, with the prime minister, agriculture minister and finance minister to resolve the sugar industry stand off. No doubt that there will be giveaways, including bank money. The vote banks will be won over with commercial banks. This has happened on large scale earlier as well. One has to remember Janardana Poojary, a Congress politician, who had become synonymous with what used to be called ‘Loan Melas’ where state run banks were asked to offer loans to all and sundry at gatherings organised by Poojary. Never mind the collateral for the loans or the viability of the projects for which these were granted. These loans were mostly given under what was known ads the ‘Twenty Point Programme’ for poverty eradication. In fact, while proper administration of these loans had helped lift at least some people from poverty, Poojary’s loan melas had come to discredit the entire approach subsequently because of high loan losses. Even subsequently, several governments at the centre had extended loan waiver schemes for smaller borrowers (many of whom were given loans under the twenty-point programme or for agricultural loans). Farm loan waiver scheme of the union government had created an expectation that such loans never need to be repaid. Eventually, the government will waive such loans at any rate.
Today, we are seeing another facet of this culture of bank loan default. This time big borrowers are refusing to pay back their loans and banks willy-nilly are writing off large chunks of these loans under what has come to be known as ‘Corporate Debt Restructuring (CDR)’. CDR simply means that if a big company had borrowed Rs 500 crore, its repayment obligation is being reset at a substantially lower level on the ground that the company has run into trouble and is not able to repay. To ensure that the entire amount is not lost, banks set their recovery at say 75 per cent of the loaned amount and waive 25 per cent. Th interest obligation is also lowered and repayment period extended.
Fortunately, the deposit bases of Indian banks are large and rising. Their total advances are also equally big in which the incidence of bad loans is not yet unbearable. However, if things go on as they are, soon that satisfaction might no longer be available. It is better to stem the rot when manageable, than when these are not. And there should be some sense of shame for those who are running away with common man’s money.
IPA
First, bad loans (euphemistically called non-performing assets) stood at a humongous Rs 1,42,900 crore at the end of 2011-2012. This has now risen to Rs 1,94,000 crore in 2012-2013. So we see that while the absolute amount of loans which look like doubtful about recovery is huge, the increase in such loans is sharp.
Further, the RBI report indicates that the public sector banks, which we look as invincible being backed by the government of India, are faring far worse in this aspect than private banks and the foreign banks operating in India are in the best situation in this respect. Of the public sector banks, State Bank of India, which is seen as standing at the apex of Indian banking structure, has the worst record. It has a far higher bad loans portfolio than others.
Much of this is due to political interference and the general policies the country has been following. Of course, there might instances when bank officials might have erred in judgment.
This should be a matter of concern for the average bank depositor as well, because it is their money that the banks lend to borrowers. If these loans are not returned in time, and the amounts go up disproportionately, it is the depositors who might have to bear the cross. In the worst case, if a bank fails under the weight of bad loan losses, the depositor might lose most of his money. The only consolation left will be some token amounts from the Deposit Insurance Corporation of India.
That is possibly an alarmist view and not likely in the immediate horizon, but if things should not go worse it should be now to check the loan losses of banks. Those who are borrowing from banks must know that their first charge was to repay those loans. No escape. The rules and procedures for recovery of bank loans should also be such that the banks should be able to reclaim their funds sequestrating all property, including personal properties, of bank borrowers expeditiously.
Currently, there is an environment in which bank loan defaulters do not face any harassment or social stigma. Maybe, they are secretly envied or admired on having escaped without repaying their loans. This happens mostly to big borrowers. Small borrowers of course repay their dues for fear of losing all their mortgages, unless government itself ask them not to pay back.
And why not? It is the government which is responsible for such a culture of not returning bank loans. Consider for example what the government proposes to do to UP and Maharashtra sugar mills. The state government have raised the minimum price for sugar cane to Rs 280 per quintal. The mills say at current sugar price, they can’t produce paying this much for sugar cane.
The government is promising them sops – including interest free bank loans – and in fact working detailed packages for these mills to start buying sugar cane at the stipulated minimum support price and begin their sugar crushing operations. When state elections are on and the next national parliamentary elections are round the corner, government is keen to see sugar canes are lifted from farmers. Such is the importance of the sugar farming community in several states that a special task force has been constituted at the centre, with the prime minister, agriculture minister and finance minister to resolve the sugar industry stand off. No doubt that there will be giveaways, including bank money. The vote banks will be won over with commercial banks. This has happened on large scale earlier as well. One has to remember Janardana Poojary, a Congress politician, who had become synonymous with what used to be called ‘Loan Melas’ where state run banks were asked to offer loans to all and sundry at gatherings organised by Poojary. Never mind the collateral for the loans or the viability of the projects for which these were granted. These loans were mostly given under what was known ads the ‘Twenty Point Programme’ for poverty eradication. In fact, while proper administration of these loans had helped lift at least some people from poverty, Poojary’s loan melas had come to discredit the entire approach subsequently because of high loan losses. Even subsequently, several governments at the centre had extended loan waiver schemes for smaller borrowers (many of whom were given loans under the twenty-point programme or for agricultural loans). Farm loan waiver scheme of the union government had created an expectation that such loans never need to be repaid. Eventually, the government will waive such loans at any rate.
Today, we are seeing another facet of this culture of bank loan default. This time big borrowers are refusing to pay back their loans and banks willy-nilly are writing off large chunks of these loans under what has come to be known as ‘Corporate Debt Restructuring (CDR)’. CDR simply means that if a big company had borrowed Rs 500 crore, its repayment obligation is being reset at a substantially lower level on the ground that the company has run into trouble and is not able to repay. To ensure that the entire amount is not lost, banks set their recovery at say 75 per cent of the loaned amount and waive 25 per cent. Th interest obligation is also lowered and repayment period extended.
Fortunately, the deposit bases of Indian banks are large and rising. Their total advances are also equally big in which the incidence of bad loans is not yet unbearable. However, if things go on as they are, soon that satisfaction might no longer be available. It is better to stem the rot when manageable, than when these are not. And there should be some sense of shame for those who are running away with common man’s money.
IPA
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